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ConAgra's Junk-Food Dividend

At first glance, agribusiness giant ConAgra(NYSE:CAG) might look like comfort food to many investors -- a source of steady sales and profits as food shoppers fill their pantries without much regard to the economic cycle. Furthermore, the stock's 5.4% dividend yield promises to satisfy an investor's hunger for income, especially compared with the average food processor's 2.5%. Investors can usually enjoy a sense of security in a stock with a stable franchise and a high-calorie dividend.

But like a bag of popcorn with too many unpopped kernels, ConAgra's stock might disappoint those who expect predictable performance. As fellow Fool Nathan Parmelee wrote recently, things will likely get a bit darker for the company before they brighten.

ConAgra has recently divested many of its commodity businesses to focus on retail products, such as Orville Redenbacher's, Marie Callender's, and Chef Boyardee, which can command higher profit margins than the chicken and beef sold in a grocer's butcher aisle. Retail products now comprise 60% of ConAgra's $14.6 billion in sales and 68% of its $1.7 billion in operating profit. The decision to emphasize branded products is partly driven by the growing consolidation of the retail distributors like Wal-Mart(NYSE:WMT), who are increasingly pressuring suppliers to lower prices. Suppliers can better resist that pressure by developing brands that consumers desire.

Gary Rodkin has taken over as ConAgra's CEO, and he brings the marketing savvy that he acquired during many years as the head of PepsiCo's (NYSE:PEP) North American unit. But Rodkin's options are constrained by circumstances, including ConAgra's brands and finances. Any effort to build excitement around ConAgra's products will require new expenditures. Unfortunately for ConAgra, last year's cash from ongoing operations was not enough to fund dividend payments and pay for new capital expenditures. Borrowing funds and selling assets to pay investor dividends is not sustainable indefinitely; it will lead to an empty cupboard. Investors should look for a cut in dividend payments -- or at least a cut in dividend growth -- in order to fund higher R&D and marketing budgets.

ConAgra is taking the correct steps to improve its competitive position, but its success is far from certain. The company competes with bigger rivals like Kraft(NYSE:KFT) and Nestle for limited shelf space. Efforts to restructure its operations remain a work in progress. The current dividend seems unsustainable. Investors hungry for comfort and stability in ConAgra stock might get a mouthful of unexpected risk and uncertainty instead.